1. Rationale for Selection
Investors require financial analysis of a company to make decisions. A financial report is significant for the purpose of providing information regarding the financial position of a company along with the risk factors associated with it. A report is prepared to provide clear and complete information about Apple Inc. that includes all relevant sections that are crucial for an investor. Apple Inc. is an American multinational company that follows GAAP (Generally Accepted Accounting Principles) to prepare financial statements and annual report for its stakeholders. Its financial analysis includes financial ratio analysis, stock price analysis, associated risks and strategies to overcome them. The report will help in identifying the past performance of the company and its plans for the future. The report is crucial for the investors to analyze various factors and make a rationale decision for investment in Apple.
Apple Inc. is a multinational technology company that has headquarters in Cupertino, California. Steve Jobs Ronald, Wayne and Steve Wozniak are the founder of Apple Inc. that started its operations in 1977. It is engaged in designing, developing, and selling software and consumer electronics. It has two categories of products that include hardware and software products. The hardware products of the company include iPhone, iPad, Mac personal computer, etc. Its software products are iTunes Media Player, OS X, I Live, etc. Tim Cook is the CEO (Chief Executive Officer) of Apple who creates the mission and vision statements of the company. The vision of Apple is simply to ensure continuous growth at every stage of the adoption of new technologies and developing innovative ideas to introduce a new product. The mission of Apple is to make developments in the existing product line, and it also emphasizes future actions of the company (Apple Inc., 2016).
2. Investor Profile Match with Apple Inc.
The client who is interested in making an investment in a company that will provide a long-term return on him. The client is not concerned with the short-term return, and he prefers to invest in a company that is expected to grow in future. Although the high risk is associated with the investment, long-term return is the priority of the client. Apple Inc. is the best company that has high risk but ensures long-term profitability to its investors. There are two main factors that emphasize that Apple Inc. is the best fit for the client.
Apple Inc. suits to the investors who make the long-term investment to get a high return in future. Apple stocks decrease in the short-term period, but it has the potential to manage it after few months. It has the potential to grow in future due to the availability of technological products that have high demand in international markets. Its force touch is the main factor that boosts up the sales of the company in the long run. Also, it rapidly adopts the change in technology and has a competitive advantage. It persistently improves its products and services by introducing new features in its core product that is iPhone that ultimately results in the increasing sales of the business (Kumar, 2015).
Apple Inc. has a variety of resources such as cash to repurchase its shares, and that is the main reason for its success. It reduces the risks of declining prices of stocks of the company. The stakeholders of the business feel relax to invest in the company that has no or loss chance of leverage in the capital market. In the case of critical situation, the board of directors of Apple Inc. purchases the shares of their owned company from the market. The action is done to counter the instability of share process in the open market (Kumar, 2015).
3. Financial Ratio Analysis
Financial ratios are calculated to determine the actual strength of the company. The past performance of a company shows its potential to grow in future. Six different ratios are calculated to analyze the past performance of Apple Inc. that is mentioned in the table below.
The current ratio is calculated to determine the liquidity position of a company (Bull, 2007). It shows the strength of a company to pay its short-term liabilities that are due within a year. The liquidity position of Apple had improved as the current ratio value increased to 1.11 in 2015 that indicates it had the potential to pay off its short-term obligations effectively. The reason is the availability of cash and short-term securities that were held by the company in 2015. Apple had generated high cash in 2015 that can be utilized to fulfill its short-term obligations. The effective management of assets allowed the company to strengthen its financial position as compared to other companies working in this industry.
The quick ratio is calculated to determine the strength of the company regarding paying its short-term obligations. It considers those current assets that are easily convertible to cash and which can be utilized to pay short-term liabilities (McCarthy, Shelmon, & Mattie, 2012). The quick ratio increased by 0.3 in 2015 that shows it has high liquidity position. The reason for the increase in this ratio was the retained cash by the company that could be utilized in a critical situation. However, the increased in the current and quick ratio are similar to each other because there is a slight change shown in inventories in 2015. Apple did not use cash to purchase inventory as the plan of the company was to invest the money in other ventures.
Price to Earnings ratio is a tool to determine the financial position of the company in the market (Mishkin & Eakins, 2015). In 2015, a decline is observed in the price-earnings ratio (i-e- from 15.12 to 12.75) that indicated investors had not get high returns from investment. However, it is discussed before that the company is suitable for long-term investment as it shows a high profit in long run. Investors can rely on Apple’s credibility and reliability regarding stock prices as it repurchases shares of the company when required.
Inventory turnover is calculated to find out the average number of days of conversion of inventory in sales. It identifies the number of days in which the company is utilizing its inventory to convert into finished goods (McCarthy, Shelmon, & Mattie, 2012). The increase in inventory turnover of Apple Inc. from 37.51 (2014) to 41.15 (2015) shows that it had effectively controlled and managed its inventory and succeed in converting the inventory to cash. It emphasizes that the management of Apple has the potential to convert the inventory into cash and cash equivalent easily. The increasing cash inflow of the company can be utilized to make further investments in the future.
Debt to assets is the ratio that determines the leverage position of the company. It indicates the percentage of assets that are financed through debts (Maynard, 2013). The debt to asset ratio of Apple Inc. increased to 18.41 percent in 2015 that indicated it had financed crucial assets by utilizing a substantial portion of debt. The company invested more in long-term securities in 2015 from that it had borrowed resources at high interest rate. It is a favorable situation as the company’s investments will provide a high return in future (after deducting the amount of principal and debt on borrowings) due to the valuation in currencies of countries in which it operates.
The net profit margin indicates the performance of a company in generating its profit as compared to sales. It is expressed in percentage and shows the efficiency of a company in generating potential profit from the revenue (Warren, Reeve, &Duchac, 2015). The net profit margin of Apple Inc. increased by 1.24 percent in 2015 indicating that the company had efficiently increased its annual sales and controlled its expenditures. The reason for the increase was the efforts of its independent distributors that contributed approximately 70 percent of the total annual sales. It was also noticeable that the company had high control over its selling and administrative expenses that were increased at a slower pace as compared to increase in total sales.
Stock price analysis indicates the trend for the fluctuation in a company’s stock prices according to the changes in price index in that specific period. The calculation of beta is crucial in analyzing the trend of Apple Inc. in relation to the overall market index.
The above-provided table consists of the historical stock prices of Apple for 2013-2015. The beta value (0.17) shows that the stock prices of the company are less volatile than the market. It highlights that Apple stocks do not change rapidly with a change in overall market but provides a high return in the long run. Also, it is a less risky investment as compared to others in the industry. The reason is the financial strength of the company as it has various financial resources that can be utilized in case of need. Apple Inc. has high recognition in the market due to its potential current assets such as cash that can change the position of the company in the stock market.
4. Risks and Strategies
Apple has various risks such as market and credit risks. These risks are associated with the high return on investments. However, Apple Inc. management is effective in minimizing the risk of revaluation of assets and fluctuations in currency exchange rates. Apple Inc. makes forward contracts to minimize the chances of loss that are likely to occur in future. The company makes investments in less risky projects and considers the estimated or expected risks involved in it. The “VAR” business model is used by Apple to determine various risks associated with the investments. In short, there are various risks that may result in the instability of business in long run. It is the major risk for the investor, but there are various strategies that can be applied to minimize the risk.
Put option is the option that provides right to sell the shares at any time. However, it is not the obligation for an investor that he has to sell the shares. The put option involves less risk as compared to others in which an investor can sell securities and shares at any time. If an investor feels unsatisfied with the dividend or any other policy of the company, he has right to sell them in the open market (Angelini& Bianchi, 2015).
The investor should have the choice to switch from one company to another. In short, there should be alternative investment opportunities for investors in the same market. If a company is not providing a potential return to the investors, he can switch or reinvest his resources in other companies. There are plenty of investment opportunities in the market that can satisfy the investor and he would get high return according to his profile in the long run.
It is an effective strategy that could be an exercise in case of persistent declining performance. IF a company is not providing potential return or the stock prices are declining continuously, the investor should sell the shares of the company to get rid of risky investments with low returns. It is associated with the fact that there should be a bottom line that is suggested by an investor or his agent at which the securities could be sold in the market.
The performance of Apple Inc. is discussed on the basis of analysis by the analystwho has knowledge of the investments in stocks and their returns. Eunice C. Marks mentioned that the company performed well till the end of 2013 as indicated by its financial statements. The ROE, ROA, and efficiency of Apple were increased in 2010-2013. He also highlighted that the plans of the company are crucial that will provide long-term profit to the company (Marks, 2013). It indicates that the company is performing well within the industry and expected to grow in the next five years.
The quantitative analysis of Apple can be explained with the help of graph that is shown below.
The above-provided graph shows that the sales of Apple Inc. increased significantly in 2015. It also reveals that the company remained efficient in selling its products and services all over the world. However, its total sales had the major contribution of distributors, Apple Inc. had managed to increase sales through introducing innovative products by using advanced technologies.
The increase in gross profit substantially in 2015 is revealed through the graph provided above. Although it has the effect of increasing sales of the company, it has also managed and controlled its direct costs. The reason for the improvement in the cost management was the efforts of production management of the company. Cost and time efficiency was noted in the inventory turnover ratio as indicated in the financial ratio analysis discussed in another section of the report. In short, it was possible due to the cost control and management practiced by the efficient production manager and other employees of the company.
The net profit of the company increased to optimum level in 2015. The selling and administration costs were also increased in this period but to the lower extent as compared to the increase in sales. The financial management of the company is also reliable and efficient in controlling the indirect expenses and costs associated with the profit of the company. The outstanding growth shown in the net profit of the company in the year 2015 indicated that it has the potential to satisfy key stakeholders of the business.
The company’s cost of capital is calculated and determined to be 8.44%. The company’s stock beta is 1.44 (high) that implies that the price movements of Apple’s stock are highly sensitive to the changes in the value of the market index. It is common for technology related stocks as they are considered riskier than other companies. The faith of technology business depends upon its innovation and cutting-edge technology that helps it to achieve a competitive advantage. In the same way, it could be stated that Apple is operating in a high competitive market that is driven by the technology generated by companies. Failure to develop and offer technology that differentiates the company and its business from other companies could lead to major decline in the company’s stock value. The company’s cost of capital is high as well. Moreover, it could be indicated that the company mainly uses its internal equity for funding its projects. The company’s debt to equity ratio is 0.54 that implies that the company’s high low leverage position and it has the ability to increase its borrowing if it requires to do so for capital investment. It could have implications for the company as new projects will require financing and from the analysis it could be indicated that the cost of equity of Apple is 12.57%. It is because the company has huge equity and it is not able to generate higher return from reinvesting it into new ventures and businesses. Therefore, higher cost of capital can have implications for the company’s new project and its pricing of new products. The competition in the technology sector is forcing companies to either lower their prices or improve their technology on a continuous basis. All this situation can create problems for the company if its technology faces tough competition from other vendors such as Samsung.
5. Recommendations
Apple Inc is suitable company for investments as it ensures long-term profitability and high return on investments. The financial condition of the company is strong in generating a potential return on long-term investments. The research identifies that investment should be based on the risk aversion strategies, and the analysis is essential in identifying the facts and figures of business. Chin & Hieu (2015) state that it is crucial to understand four factors that are value, momentum, size, and liquidity while making an investment. Apple is a large size corporation that has high liquidity position, so the factors are indicating it is a preferable investment for an investor who is willing to buy its shares.
Asker, Farre-Mensa, & Ljungqvist (2015) also state that stock market is a puzzle, so an investor needs to analyze the performance of a company by viewing news related to it. Bulsara, Dhingra, & Gandhi (2015) explain that it is important to determine the preference of an investor that is either he prefers a long-term or short-term return on the investments. As there are a variety of risks associated with the long-term investments that are mentioned in the separate section of the paper. Apple is suitable for the investor who is willing to get a long-term return on the investment. Birger (2015) suggests that there are many options available to the stock markets, and investors should have an alternative option that can be utilized in case of need.
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Appendices
